Most gold analysts surmise COMEX 100-ounce gold futures contracts (GC) can only be physically settled through taking and making delivery. This is technically true when excluding the possibility of EFP trading in GC through the over-the-counter (OTC) market. While on Exchange trading in GC is “executed openly and competitively”, trading GC in the OTC realm (and thus the price of the gold, its form and location) is a “privately negotiated transaction” between buyer and seller. The COMEX is a subsidiary of CME Group, which offers its clients OTC trading on a platform called ClearPort.

Because the COMEX in New York is the most liquid gold futures exchange globally – offering precious metals futures denominated in the world most used currency the US dollar, gold industry participants use GC for a variety of reasons, including hedging metal held outside the contract’s deliverable geography. Subsequently, the contracts can be physically “settled” anywhere at any price through EFP.

In EFP two parties sign a futures contract (short and long) and simultaneously execute a reverse spot transaction (buy and sell). One side sells short the futures contract and buys spot gold (the spot leg is referred to as the related position by CME), while the other buys long the futures contract and sells the related position. EFP trading can increase the open interest, decrease the open interest, or not change it, depending on the existing positions held by both parties before they enter into an EFP transaction. When EFP decreases the open interest the phrase “settle positions” is applicable. Another way of saying it would be “offsetting positions” or “netting out positions”.

This example matches my previous one regarding EFP (hedging metal held outside the contract’s deliverable geography). Any bullion bank, miner or refinery can sell short on COMEX and when the gold needs to be physically “settled”, for example in Switzerland, the short position can be unwound through EFP. The only requirement is that “the quantity of the related position component … must be approximately equivalent to the quantity of the Exchange component” – meaning the spot leg must be more or less 100-ounces of gold, which is the underlying asset of GC. In this example the GC short holder connects through CME ClearPort to Exchange For Physical. In the EFP transaction he will buy long a futures contract and simultaneously sell spot. His long and short will then be netted out while he sells spot the physical in Switzerland. Effectively, a COMEX short has been physically settled outside the contract’s deliverable geography. Naturally, a long position can also be unwound in Switzerland, which is then the other side of the trade.

EFP Moves Kilobars Through CME’s Hong Kong Vaults

In March 2015 CME launched a Gold Kilo Futures contract (GCK) physically deliverable in Hong Kong, but ever since implementation there has been poor participation in this instrument. From the start GCK trading volume has been close to nothing and deliveries rarely occur. Notwithstanding, there are massive volumes of kilobar gold flowing through the CME approved warehouse in Hong Kong owned by Brink’s, Inc.. On average 3.9 tonnes per day are withdrawn from this vault, but sometimes daily withdrawals are as high as 20 tonnes.

Exhibit 2. CME Kilobar delivery volume is so low it’s not visible.

Because volume and delivery for GCK on Exchange is so low, the withdraws must be explained by OTC trades. A CME representative actaully confirmed this to me; the physical movement through the Hong Kong vaults is caused by EFP transactions.

But if we look at the GCK volume page we can never observe any EFP trades being disclosed. In contrast, EFP volume of GC is substantial. Can it be gold kilobars in CME’s approved warehouses in Hong Kong are used to settle the 100-ounce futures contracts? Yes.

My theory is that kilobars bought by bullion banks in the West, for example at Swiss refineries, to be consigned to China are hedged on the COMEX and once the gold arrives is Hong Kong the shorts are unwound through EFP. From there the gold is transported by armored truck to Shanghai Gold Exchange designated warehouses in Shenzhen by Brink’s that has a cross-border logistics license from the Chinese government. Supportive to my theory, see exhibit 3 below. Notice the strong correlation between “gold import into Hong Kong versus kilobars received in CME’s vaults” and “re-export from Hong Kong versus kilobars withdrawn from CME’s vaults”.

Exhibit 3.

The correlation points out most gold moving through Hong Kong, which is headed for China, is in kilobar form and moves through CME’s vaults. And because most of this throughput is EFP related, I assume the kilobars are used to settle COMEX futures.

It’s hard to test if my theory is accurate because EFP transactions are executed in the OTC realm and little information is available. Possibly, al throughput in Hong Kong is EFP related but doesn’t impact the GS open interest. If anyone has a different theory please comment below.

London Gold Offsets COMEX Futures

We’ve established gold in Switzerland and Hong Kong is used to “settle” gold futures. But there is also proof gold in London is used to phase out positions on the COMEX. When researching this topic I reached out to William Purpura who is, inter alia, Chairman at Northport Commodities, member of the COMEX Governors Committee, and previously traded on the COMEX floor from 1982 to 2007. I asked Purpura for an example of how EFPs are used. He replied [brackets added by me]:

Most of it [EFP] is done by bullion banks. … It’s mainly for netting out. Lot’s of times London versus New York. You see lots of EFPs posted around 8am in New York on COMEX.

There it is, “London versus New York”, and, “netting out”. From this quote we learn loco London gold is used to execute EFPs to wash out New York futures positions. One can argue the related position in London is “unallocated” – I’m not sure. In the latest formulation by CME on EFP (Market Regulation Advisory Notice RA1311-5R) it’s stated:

Where the related position component … is a physical transaction … the transaction should be submitted for clearing as an EFP transaction type.

Often in wholesale gold market parlance physical is also used for “unallocated gold”, which is not exactly physical in my opinion.

I’m sure there are many more methods than I’ve mentioned to use EFP, or any other privately negotiated transaction (PNT) available on ClearPort, that influences the open interest at the COMEX. One thing is for sure, conventional delivery is not the only way to terminate futures positions. In the gold futures rulebook this is explicitly noted by CME Group. The excerpt below is about terminating a gold futures contracts [brackets added by me].

113102.E. Termination of Trading

No trades in Gold futures deliverable in the current month shall be made after the third last business day of that month. Any contracts remaining open after the last trade date must be either:

(A) Settled by delivery which shall take place on any business day beginning on the first business day of the delivery month or any subsequent business day of the delivery month, but no later than the last business day of the delivery month.

(B) Liquidated by means of a bona fide Exchange for Related Position [/EFP] … .

This is important for our comprhension of the global paper and physical gold market. COMEX gold futures delivery statistics are not all there is to it.

It began to dawn on me when I was writing a post on May 27th about the Shanghai Gold Exchange international board. For the post I added a video from CNBC with Joshua Rotbart, general manager of Malca-Amit precious metals, a vaulting company that recently openend a 2000 tonnes vault in the Shanghai Free Trade Zone (FTZ). In the video Joshua explains about his business in the FTZ. His position – bullion banks being his clients – gives him a lot of expertise with regard to global gold trade. Listen what he says on 1:40.

[youtube https://www.youtube.com/watch?v=g6fQOQtczpM]

So currently gold being transported to China, had to be imported only by local banks. So a lot of the time the gold is being parked out of China and only transferred and shipped into China when needed. What happens now, is that you can park the gold in the Free Trade Zone and it’s not considered final importation into China. Financial institutions can trade within the facility and then only upon request ship it to China.

Hong Kong Gold Trade With China Mainland

At this moment there are 12 banks (listed at the bottom of this article) that can import gold into China. These banks have a PBOC license to import gold, though for every shipment they need anew approval. Before approval the gold is “parked out of China”, like Joshua says. “…and only transferred and shipped into China when needed”, should be interpreted as only shipped into China when PBOC approval is granted. In the past years most gold that entered China mainland came in through Hong Kong. Why? Because Hong Kong was the parking spot for gold outside of China before it was allowed to be imported. This will soon change as the Shanghai FTZ will take over this role.

In 2013, the year Chinese demand for physical gold exploded, Hong Kong gross gold import was 2239 metric tonnes. The bulk of this was exported to China mainland (net 1158 tonnes), but a staggering 597 tonnes was left behind. Hong Kong is inhabited by 7 million people who couldn’t have bought 597 tonnes of gold in one year. According to my analysis most of Hong Kong’s net import is floating supply that was shipped to the East by the bullion banks, pending for a bid in Asia, likely from China.

From January 2010 to April 2014 Hong Kong net imported 938 tonnes of gold.

Before we jump conclusions over the amount of gold in Hong Kong, I would like to expand on a few reasons that can put this amount in perspective. As some of …

the gold is smuggled to the mainland. Illegally or tolerated by Chinese customs. In China mainland there is a 22 % tax on jewelry, in Hong Kong it’s zero %. Mainland tourist often go to Hong Kong specifically to buy jewelry. Chinese travel agencies even offer jewelry shopping trips to Hong kong. Whatever they buy is tolerated to be brought into the mainland by Chinese customs without restrictions (note, they’re are very stringent when it comes to gold export, only 50 grams per person). About half the jewelry sold in Hong Kong is bought by mainland tourists.

the mainland tourist buy gold in Hong Kong and store it locally.

the gold is smuggled to India or other countries in Asia. Click here for a newspaper article from 1969 about gold smuggling via Hong Kong. This practice has been going on for many decades.

the gold is vaulted in Hong Kong by custodial companies from around the world, like GoldMoney (though GoldMoney only has 2 tonnes stored in Hong Kong).

the gold is possibly purchased by the PBOC or its subsidiary SAFE, but I think this is unlikely. PBOC wouldn’t show up in any customs report.

These arguments are worth mentioning, but I think there still is a few hundred tonnes floating supply allocated in Hong Kong. We’ve heard stories from refineries in the West (Switzerland) that supply is running dry. Perhaps this is not the case in in the East (Hong Kong) – explaining the occasional discount at the Shanghai Gold Exchange.

In April 2014 Hong Kong net imported 13 tonnes, the lowest figure since February 2013. It will be interesting when Hong Kong becomes a net exporter. Have a look at their monthly gold trade since January 2013:

If we look at net import we can see gold piling up in Hong Kong after April 2013, when the price crashed and Chinese demand exploded. Not only the mainland net imported unprecedented amounts of gold throughout 2013, in anticipation there was also a lot parked outside, pending to be imported.

Because China is the largest buyer on earth and there is still a pile of gold waiting next door, the moment Hong Kong will be net exporting could be the tipping point in the physical gold market.

Hong Kong net exported 67 tonnes to the mainland in April, also the lowest figure since February 2013. This is in line with dropping Chinese gold demand in April, measured at the SGE. The link between Hong Kong net export to China en Chinese demand will soon be gone as banks are already moving gold into The Shanghai FTZ.

Year to date China net imported 354 tonnes from Hong Kong.

Gold Trade In The Rest Of The World

China was mainly supplied by the UK in 2013, that net exported 1425 tonnes over this period. Chinese demand has been “flat” since March, which caused the UK to become a net importer in April – for the first time since December 2012.

Based on historic trade data there is still bullion in London, that’s for sure, the question is how much of that can be sold when demand from the East will rebound. Though the UK was a net importer in April, they net exported 22 tonnes to Switzerland.

When we look at Swiss gold trade year to date, it’s clear that their booming refining business is fading; total import and total export is dropping – UK net import is down and also net export to Hong Kong is down. Switzerland did have a gold trade surplus every month in 2014, year to date they have net imported 131 tonnes, this is likely to be Western investment demand.

Conclusion

I’m very curious what’s gonna happen if physical demand for gold (mainly from China) will rebound in the coming months. Will the UK, US or Switzerland (net) export any gold? My eyes are on SGE withdrawals (Chinese demand) and Hong Kong net gold trade.

This is a screen shot from the weekly Chinese SGE trade report; the second number from the left (blue – 本周交割量) is weekly gold withdrawn from the vaults in Kg, the second number from the right (green – 累计交割量) is the total YTD.

Of course the big question is; where on earth is this gold coming from? Let’s have a look at global trade numbers published so far this year to shine some light on this mystery. As I have written about in 2013, the main gold vein that supplied China ran from the UK, through Switzerland, through Hong Kong eventually reaching the mainland. As we all know China mainland doesn’t disclose its gold trade numbers, but the other countries do (to a certain extent, monetary gold is usually not disclosed).

The Physical Gold Distribution From West To East

The UK net exported 1425 metric tonnes in total in 2013. The peak was in May, 338 tonnes were net exported to meet demand in the east after the drop in the price of gold in April, whereafter UK gold export somewhat slowed. Chinese demand came down from unprecedented highs in April, but remained robust throughout 2013. UK gold export and Chinese demand were correlated during last year.

Around new year and the Chinese Lunar year demand for gold in the mainland picked up again as we can see in the chart below (and as I have reported here, here and here).

Now the global trade numbers from that period are released we again see matching trends in global gold trade and Chinese demand (/SGE withdrawals). In January 2014 there was a steep increase in UK’s net gold export; 143 tonnes in total, 118 tonnes were net exported to Switzerland and 33 tonnes net to Hong Kong.

What a surprise, there is still gold left in the London vaults. Most analyst thought these vaults were practically empty at the end of 2013. Like Kenneth Hoffman, who stated in December 2013 on Bloomberg TV that the London gold vaults were virtually empty. All gold was exported to Switzerland, remelted into kilobars and sent to China. He also stated: The most interesting thing is, as we look into 2014, if there ever is interest in gold again, that gold is just not there anymore. Well guess what, there is interest in gold again, coming from China. And doesn’t seem to stop at these prices.

[youtube https://www.youtube.com/watch?v=yewuiAJyJco]

Another reason why analysts thought the UK wouldn’t be coughing up more physical gold was because GLD inventory stopped falling since the beginning of January. After being drained for 552 tonnes in 2013, year to date GLD is up 22 tonnes.

A Gift From Switzerland

Since January the Swiss Customs Department decided to change the way they disclose their gold trade numbers. Previously they only disclosed total gold and silver trade numbers, now they break it down per country. This gives us gold analysts very valuable insights. A pleasant side-effect is that the Swiss publish their data much sooner than all others.

In total Switzerland gross imported 477 metric tonnes of gold in first two months of 2014. The biggest supplier was the UK, smaller ones were Brazil, Burkina Faso, Chile, Peru, Russia, South Africa and the US. Total Swiss gross gold export over this period accounted for 400 metric tonnes.

A we can see from the chart not only did the UK net exported 118 tonnes to Switzerland in January, in February another 114 tonnes were shipped to the Alps. In two months the Brits net exported 232 metric tonnes to Switzerland, while GLD inventory was up! What Keynesian is still selling in the UK? Or more important, how much is there left to sell? There are probably a few thousand tonnes left in the vaults of the Bank of England, but that’s all owned by foreign nations.

As we heard from the biggest Swiss refinery in December 2013, they were having a very hard time throughout 2013 sourcing the gold for demand from China. An event that never happened in the last 37 years, according to the managing director of this refinery. Yet, in February the Brits shipped 114 tonnes to Switzerland. Anybody who knows the seller please comment below.

Also worth noting; in January Switzerland net exported 12 tonnes to China and 85 tonnes to Hong Kong. In February net export to China accounted for 37 tonnes and to Hong Kong 98 tonnes. Coming months will point out if this change, direct exporting to China bypassing Hong Kong, will become a trend.

Reaching Asia

In January Hong Kong net imported more gold than they net exported to the mainland. The Special Administrative Region net imported a staggering 114 metric tonnes (some of this gold is smuggled into the mainland in jewelry form by mainland tourist, please read at the end of this post), while they only net exported 89 tonnes to the mainland.

If we gather all the data we have from January we must conclude that although the main gold vein is still in full swing, it’s not enough to supply the Shanghai Gold Exchange. SGE withdrawals in January accounted for 246 tonnes.

This is a screen shot from the monthly Chinese SGE trade report; the second number from the left (blue – 月交割量 ) is monthly gold withdrawn from the SGE vaults in Kg.

In January China net imported 89 tonnes from Hong Kong, 12 tonnes from Switzerland, domestic mine supply was 36 tonnes, domestic scrap supply couldn’t haven’t been more than 25 tonnes, which leaves 83 tonnes that had to be imported from other countries. I still don’t have any estimates on how much gold China imports from its own overseas mines, however I doubt its 83 tonnes a month. Concluding not only in the UK, also in other countries around the world large stock piles of gold are still being sold to China.

The most significant parameter to measure the gold distribution from west to east is the trade vein that runs from the UK through Switzerland through Hong Kong, eventually reaching Shanghai.

The UK Source

In October the UK has net exported 90 tons of gold to Switzerland, – 16 % m/m, year to date the Swiss have net received 1199 tons. The UK net exported 1326 tons in total in the first ten months of this year, of which 477,9 tons were sourced by GLD. The unusual outflows remain elevated throughout the entire year. Also note, the UK is hardly importing any gold this year, as if physical gold is difficult to source.

From 1 January until 31 October GLD lost 15.3 million shares. Can it be the Chinese redeem physical gold from GLD through “agents” like Blackrock that have sold huge amounts of shares this year and possibly redeemed these shares for physical gold through GLD’s authorized participants? Just a theory..

This is a picture taken on 25 November 2013.

On the right we can see Mr. Xie, president of China’s third largest Sovereign Wealth Fund NSSF, on the left Mr. Lawrence Fink, chairman and CEO of BlackRock.

Pass The Swiss

The Swiss only publish their total gold trade numbers every 3 months; last data was from September. As we can see from the chart, all the gold that is being imported into Switzerland this year is being remelted and exported; this was also confirmed by a Swiss refinery. Exports stand at an all time record this year at 2184 tons, and there are 3 months left on the calendar. Annualized exports would be 2912 tons, which is 1362 tons more than what the Swiss exported in 2012. We may assume this difference in exports is additional supply for the east.

The bulk of Swiss gold export is heading east, some directly to Shanghai, some first to Hong Kong. From the Hong Kong Census And Statistics Department we know 779 tons were net imported from Switzerland into Hong Kong year to date. 651 tons more than what was net imported in total in 2012.

The Hong Kong Trading Hub

We can see a correlation between the net amount of gold that comes into Honk Kong from Switzerland and the net amount that goes out to the mainland. Concluding, most mainland net gold imports through Hong Kong are being supplied by Switzerland.

We can also see strong UK net export of gold to Switzerland prior to April (in April the price of gold crashed and Chinese physical buying exploded), but this not unusual as we can see from the “UK Gold Trade” chart ranging from 2009-2013. Often huge volumes are shipped between the UK (LBMA) and Switzerland (refineries).

If SGE delivery is mainly supplied by import from Hong Kong, demand is certainly not waning. In November 168 tons were withdrawn from the SGE vaults, up + 21 % from October. (compared to 0.121 tons of physical delivery at the COMEX in November. More information on the differences between physical delivery at the SGE and COMEX can be found here and here)

A remarkable phenomenon that has happened in Honk Kong trade earlier this year was this:

There was a huge spike in gold export from Hong Kong to the mainland in March. As if someone knew there was going to be immense demand for physical in April in the mainland. But why would anybody import expensive gold in March to sell it for bottomprices in April? The answer: Chinese import doesn’t have to work like that. Like I described in this article gold can be consigned by, in example, HSBC and ICBC.

This is how it works; the consigner HSBC (Hong Kong and Shanghai Banking Corporation) can ship the gold to the Mainland, without selling it at this stage. On arrival it has to be registered within 7 days at the SGE and move into the vaults. The gold is now merely transported, not sold.

The consignee ICBC will then ask HSBC for a quote in USD/oz (International Spot) and then decides the offer RMB price at the SGE. The SGE Premium is based upon freight costs, insurance costs, customs declaration fee, storage fee, ICBC’s profit, etc.

After the gold is sold on the SGE, ICBC must pay HSBC in USD within 2 days and also needs to let the State Administration of Foreign Exchange verify the payment.

I am aware that there was an arbitrage opportunity in early 2013 that could have explained some of the high volumes of gold trade between Hong Kong and the mainland. Though this couldn’t have explained the record net gold export, just before the price dropped in April and the SGE was stormed for physical gold.

In between 22 and 26 April 117 tons of physical gold was withdrawn from the SGE vaults. That is an exceptional amount of gold to hold in stock, unless one knew demand would rise significant and had made pre orders accordingly. Just a theory..

In any case, the main vain has brought the mainland 957 tons of gold in the first ten months of this year, annualized 1148 tons. But Hong Kong is certainly not the only port through which the mainland is importing gold, my analysis shows the mainland’s total net gold import can reach up to 2000 tons this year.

Hong Kong net imported 510 tons of gold in this period. Further research should point out how much of this was smuggled into the mainland.

While I’m still researching all the other ways of how the Chinese may be smuggling gold from Hong Kong into the mainland, I came across an interesting video from CCTV in which is exposed how smugglers dig tunnels underneath Honk Kong borders in order to transport “goods” to places where there is demand for “goods”.

There are a little more than 7 million people living in Hong Kong, though this special administrative region of the People’s Republic Of China has net imported 510 tons of gold year to date.

I think everybody who has just one IQ point more than Ben Bernanke can figure out that the Hong Kong population can never “consume” this immense amount of gold by itself. The main reason for these mass net imports is because Hong Kong is used to store gold for bullion dealers from all over the world. Another reason is that half of all jewelry sold in Hong Kong is bought by mainland tourist that bring it home undeclared simply by wearing the jewelry on their bodies.

But now it seems there are other ways to bring gold to where gold is in demand. If we look at the video we can see a tunnel of 80 cm high and 100 cm wide. Not particularly big enough for cars and boats to pass through, but excellent for small valuable goods like gold (and drugs). So maybe, just maybe, a small part of the 510 tons was exported to the mainland through tunnels like these by people that were not so fortunate to have a PBOC gold trading license.

This week the the Hong Kong Census and Statistics Department officially released their trade numbers from October. Whilst they offer specific numbers in advance to anybody willing to pay, I rather wait for the total booklet to be published free of charge.

Most significant is the amount of gold net exported to the mainland, up 21 tons from 109 tons in September to 130.2 tons in October, + 19 % m/m, +446 % y/y, just shy of the all time record of 130.3 tons in March. Reinforcing an upward trend that started in 2011. Year to date Hong Kong net gold export to the mainland stands at 957 tons, + 200 % relative to the same period in 2012.

The main source for Hong Kong’s gold is still Switzerland. Hong kong net gold import from Switzerland in October was 85 tons, down from 99 tons in September, – 14 % m/m. Year to date total net import from the Swiss stands at a massive 782 tons.

In the screen dump below from the Hong Kong Census report we can see gross gold (HKHS code 97101) import from Switzerland (CH) in October in the first column. The third column is the amount of gold imported year to date. The other big suppliers are Australia (AU) 141 tons, Great-Britain (GB) 92 tons, the United States (US) 172 tons, and South Africa (ZA) 138 tons.

At the bottom of the screen dump we can see total Hong Kong gross gold (HKHS code 97101) import year to date, 1893 tons. If we add gold coin import the total amounts to 1933 tons YTD, total gross export is 1423 tons YTD; net import stands at 510 tons YTD. Some of this gold is bought in jewelry form by mainland tourist and shipped home undeclared. In Hong Kong there is 0 % tax on jewelry, in the mainland this is 22.5 % – valued added tax (VAT) 17.5 % and consumption tax 5 %. It’s quite common for the Chinese to go on jewelry shopping trips to Hong Kong, how much gold is imported this way (undeclared) into the mainland I will analyze in a forthcoming post.

The mainland and Hong Kong combined net gold inflow year to date is 1466 tons.

For the charts in this post I have summed up the following gold categories from the trade reports:

HKHS code (Hong Kong Harmonized System)

98002: GOLD COIN AND CURRENT COIN
97101: GOLD (INCLUDING GOLD PLATED WITH PLATINUM), NON-MONETARY, UNWROUGHT OR IN SEMI-MANUFACTURED FORMS, OR IN POWDER FORM

In Gold We Trust

For clarity, these charts are all based on trade numbers from Hong Kong. With these numbers we know how much gold ends up in Hong Kong itself (import minus export) and how much gold Hong Kong trades with other countries (net import or export). The “China net inflow charts” are only about the amount of gold that China mainland net imports through Hong Kong.

The great distribution of wealth and power, facilitated by gold, from west to east is still going strong. From looking at available global trade numbers we know the main gold vein runs from the UK through Switzerland, through Hong Kong, eventually reaching Shanghai. Let’s take a look at the latest data.

Starting Point: The London Gold Vaults

It started in January when the UK, home of the London Gold Market, net exported 74 tons of gold to Switzerland. As we can see in the chart below this is not unusual, we saw similar events in the beginning and in the end of 2011. But this year export accelerated to a spike May, in which 237 tons were net exported to the Swiss. A staggering amount of gold, nearly as much as the official gold reserves of the Bank Of England. Through the summer these exports remained elevated, year to date the UK has net exported 1235 tons of gold in total, of which 1109 tons to Switzerland.

In September the UK net exported 117 tons of gold, down from 119 tons in august, – 1.7 % m/m. Net export to Switzerland was 107 tons in September, up from 98 tons in August, + 9.1 % m/m. This implies we have not seen the end of the gold exodus from the UK.

GLD Redemptions

A significant portion of UK gold exports are being supplied by ETF stocks. GLD, which is the biggest gold ETF in the world and whose vaults are in London, was drained for 444 tons in the first three quarters of this year. At this moment GLD’s inventory stands at 866 tons, more stock suited for it’s authorized participants to be redeemed and shipped to the east.

note “Unallocated Accounts”

Remelting The Gold Bars In Switzerland

Although the Swiss, discreet as they are, do not publish country specific with whom they trade gold, nevertheless, their total trade numbers are very clear. Being one of the biggest trading, refining and storage centers in the world, vast amounts of gold cross their borders. In 2012 they have imported 2267 tons of gold and exported 1550 tons. On average import has transcended export by 25 % in recent years, which emphasizes Switzerland’s storage function over this period. This has changed as the Swiss have imported 2420 tons and exported 2184 tons in the first three quarters of this year. Meaning not only trade is surging, but also that the gap between import and export is tightening. As was confirmed by Switzerland’s biggest refinery, all gold coming in from London is being remelted into kilobars and sent forward to China.

If we annualize gold export for 2013 the outcome is 2912 tons, 1362 tons more than in 2012. Gold that partially is shipped to Hong Kong, partially directly to Shanghai.

Transit Port Hong Kong

Most (but certainly not all!) gold that is imported by China mainland comes in through Hong Kong. Year to date Switzerland has net exported 697 tons of gold to Hong Kong. A surge of 445 % if we measure just the first three quarters relative to 2012 totals.

Net export from Hong Kong to the mainland is 826 tons of gold year to date.

Just the official route has brought 826 tons of gold to China year to date, annualized 1100 tons. If we add 400 tons Chinese mining supply the total is 1500 tons othat will meet demand.

Whilst the World Gold Council estimates Chinese consumer demand will be over 1000 tons, my estimate is it will be over 2000 tons. In my humble opinion just the official route raises a few eyebrows to the WGC demand numbers. If we then take into account gold is also shipped into China through other ports than Hong Kong, more eyebrows are raised.

In a future post I will describe in detail how I calculated my estimate.

In Gold We Trust

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